Market Update
As Hurricane Sandy makes media headlines around the world, the NYSE opened today for trading after being closed on Monday and Tuesday. However, just because the U.S. stock market is open does not mean that it's business as usual. Traders on the floor of the NYSE are having issues with cell phone service as it keeps cutting in and out. Trading volume and liquidity in the FX market seems rather light, as a lot of financial firms with physical locations in the New York City area are experiencing electricity outages, missing personnel, or both.
I'm taking caution and not putting on any decent sized positions as I wait for market conditions to stabilize. Also, it's extremely unlikely that any major trend causing events will occur before the presidential election, so I would probably be sitting on my hands anyway. There are some important U.S. economic data releases coming out on Thursday and Friday, but I don't know how much credibility I can give the resulting moves as they are occurring before the election. The whole aspect of how either candidate being elected would effect expectations about QE is still not clear. My speculation is that a Romney win may result in expectations of future hawkish monetary policy thus resulting in the market selling off. I'm guessing an Obama win would not cause the markets to go much higher - just prevent an immediate sell-off.
Events to note: once the presidential election is out of the way. The troika report that was purposely delayed at the request of Washington can come out (Yes, the U.S. is a member of the troika.) The latest on the release of the report suggests Nov. 11th or 12th. This report is what "everyone has been waiting for" and may have dire implications for Greece's future in the Eurozone. Also, there are (more) strikes planned in Greece on Nov. 6th & 7th. - I would put them on your market calendar because they have the potential to sour market sentiment very quickly.
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Wednesday, October 31, 2012
Friday, October 26, 2012
Forex Trading Update: USD/JPY
Last night at 7:30 PM EST the Japanese CPI numbers came in better than expected.
Tokyo Core CPI y/y Actual: -0.4%, Expected: -0.5%, Previous: -0.4%
National Core CPI y/y Actual: -0.1%, Expected: -0.2%, Previous: -0.3%
Check out a chart of Japan's inflation rate here.
As we know, the Bank of Japan has been struggling with deflation and these better CPI numbers came as good news to the BOJ. Since the news came out, the Yen immediately appreciated against the dollar and has been trending down since then. It fell from 80.33 at the time of the announcement to 79.50 at 10:00 AM EST.
To understand why the Yen was appreciating today, we first need to look at why it has depreciating over the last 2 weeks. USD/JPY has been ripping up since Oct. 11th when the Bank of Japan began jawboning about injecting more stimulus into the economy. The BOJ then began dropping hints that the actual size of this latest round of QE would be substantially larger then what market participants had been expecting (10 trillion yen to 80 trillion yen.)
The Bank of Japan is engaging in quantitative easing for two reasons: The first, to devalue their currency to aid their exporters. A weaker Yen makes exports from Japanese manufacturers cheaper for foreign buyers. This is critical for Japan's manufacturing base as the country is an export based economy. In addition, there has also been an immense amount of political pressure on the Bank of Japan to help exporters. (I like to think of this in terms of big oil companies sending lobbyists to Washington.)
The second reason is to try and increase inflation. Inflation of 2.0% - 3.0% is typically considered normal for a healthy developed economy. If inflation were to increase, that would in turn lower the real rate of return on Japanese Government Bonds (JGBs) and cause the demand for these bonds to decrease. What happens when the real rate of return on these bonds decrease? There will be decreased demand for these bonds during periods of risk aversion as investors move their money into safe havens. (Safe havens = US 10YR, 10YR JGB, Swiss banks, etc.) - The decrease in the real rate of return on the JGBs will cause a significant amount of money to flow into other safe havens that would normally flow into JGBs.
So how do we trade this? I think we need to wait for guidance from the BOJ on Tuesday. They will be issuing a statement on monetary policy, making a decision on the overnight call rate (you can check for this here), and holding a press conference. The important thing to realize at this point is that the rules of the game may be changing. In the near future, it's very possible that the Yen does not appreciate against the dollar (USD/JPY down) during periods of risk aversion. We've been seeing evidence of this since last week.
BeamFX is a Guaranteed Introducing Broker for Institutional Liquidity (ILQ). Open a free demo account today!
Tokyo Core CPI y/y Actual: -0.4%, Expected: -0.5%, Previous: -0.4%
National Core CPI y/y Actual: -0.1%, Expected: -0.2%, Previous: -0.3%
Check out a chart of Japan's inflation rate here.
As we know, the Bank of Japan has been struggling with deflation and these better CPI numbers came as good news to the BOJ. Since the news came out, the Yen immediately appreciated against the dollar and has been trending down since then. It fell from 80.33 at the time of the announcement to 79.50 at 10:00 AM EST.
To understand why the Yen was appreciating today, we first need to look at why it has depreciating over the last 2 weeks. USD/JPY has been ripping up since Oct. 11th when the Bank of Japan began jawboning about injecting more stimulus into the economy. The BOJ then began dropping hints that the actual size of this latest round of QE would be substantially larger then what market participants had been expecting (10 trillion yen to 80 trillion yen.)
The Bank of Japan is engaging in quantitative easing for two reasons: The first, to devalue their currency to aid their exporters. A weaker Yen makes exports from Japanese manufacturers cheaper for foreign buyers. This is critical for Japan's manufacturing base as the country is an export based economy. In addition, there has also been an immense amount of political pressure on the Bank of Japan to help exporters. (I like to think of this in terms of big oil companies sending lobbyists to Washington.)
The second reason is to try and increase inflation. Inflation of 2.0% - 3.0% is typically considered normal for a healthy developed economy. If inflation were to increase, that would in turn lower the real rate of return on Japanese Government Bonds (JGBs) and cause the demand for these bonds to decrease. What happens when the real rate of return on these bonds decrease? There will be decreased demand for these bonds during periods of risk aversion as investors move their money into safe havens. (Safe havens = US 10YR, 10YR JGB, Swiss banks, etc.) - The decrease in the real rate of return on the JGBs will cause a significant amount of money to flow into other safe havens that would normally flow into JGBs.
So how do we trade this? I think we need to wait for guidance from the BOJ on Tuesday. They will be issuing a statement on monetary policy, making a decision on the overnight call rate (you can check for this here), and holding a press conference. The important thing to realize at this point is that the rules of the game may be changing. In the near future, it's very possible that the Yen does not appreciate against the dollar (USD/JPY down) during periods of risk aversion. We've been seeing evidence of this since last week.
BeamFX is a Guaranteed Introducing Broker for Institutional Liquidity (ILQ). Open a free demo account today!
Wednesday, October 24, 2012
Forex Trading Update: AUD/USD
As many of you know, I recently tweeted about what I believe to be a large automated seller(s) that sold the AUD/USD repeatedly as it popped above 1.0315 over an 8 hour period. (9PM-5AM EST 10/23-10/24). I was trading the GBP/AUD on 10/16 when I noticed very similar price action (8AM-3PM EST). At that point, GBP/AUD was putting in a swing high at 1.5700 and promptly fell 250 pips over the next 2 days.
Now, I can reasonably conclude that if a seller is using an automated system for a series of orders that has a large impact on price action they won't be playing for 10 pips and they are fairly confident in the direction of their position. As to their stop loss, I somehow doubt that a large seller that has taken 8 hours to accumulate a position will be exiting because it has risen by 50 pips. It could rise 200 pips and they could still stay in the trade. I'm guessing that their target is well below parity. For some reason, whatever reason, their models and algorithms told them the place to sell was 1.0315. I definitely want to be on the same side as what I believe to be a very large player; but I'll wait for this move up to wane, consolidate, and start to fall before I get short.
Why is the Aussie currently so strong? There are 3 main factors that influence the Aussie:
1. Australian Economic data: (CPI, unemployment, housing, etc.)
2. The economic situation in China: this affects expectations about demand for Australian exports which are mainly used as inputs in manufacturing and industrial production in China.
3. Risk appetite: the degree to which institutional traders and investors are willing to take risk. In a "risk on" scenerio, traders are will to accept a higher degree of risk in return for higher yields. High yielding bonds, stocks, and currencies are the primary beneficiaries. (i.e. low grade corporate bonds, the S&P 500 index, Aussie & Kiwi dollar, etc.)
Since the beats on Aussie CPI numbers last night (Actual 1.4%, Expected 0.9%, Previous 0.5%) and the Chinese HSBC Flash Manufacturing PMI (Actual 49.1, Previous 47.9) the Aussie has rallied from the 1.0250 area. Its closes were held above the .618 fib (daily chart, low on 10/8 to high on 10/18.) The Aussie is currently trading at 1.0350, but despite this rally we really have to see an increase in risk appetite to support an Aussie uptrend. It can happen, but I prefer playing this pair to the downside after a period of consolidation.
Note: I consider the FOMC minutes due out later today to be a wild card which could cause a large move in either direction.
BeamFX is a Guaranteed Introducing Broker for Institutional Liquidity (ILQ). Open a free demo account today!
Now, I can reasonably conclude that if a seller is using an automated system for a series of orders that has a large impact on price action they won't be playing for 10 pips and they are fairly confident in the direction of their position. As to their stop loss, I somehow doubt that a large seller that has taken 8 hours to accumulate a position will be exiting because it has risen by 50 pips. It could rise 200 pips and they could still stay in the trade. I'm guessing that their target is well below parity. For some reason, whatever reason, their models and algorithms told them the place to sell was 1.0315. I definitely want to be on the same side as what I believe to be a very large player; but I'll wait for this move up to wane, consolidate, and start to fall before I get short.
Why is the Aussie currently so strong? There are 3 main factors that influence the Aussie:
1. Australian Economic data: (CPI, unemployment, housing, etc.)
2. The economic situation in China: this affects expectations about demand for Australian exports which are mainly used as inputs in manufacturing and industrial production in China.
3. Risk appetite: the degree to which institutional traders and investors are willing to take risk. In a "risk on" scenerio, traders are will to accept a higher degree of risk in return for higher yields. High yielding bonds, stocks, and currencies are the primary beneficiaries. (i.e. low grade corporate bonds, the S&P 500 index, Aussie & Kiwi dollar, etc.)
Since the beats on Aussie CPI numbers last night (Actual 1.4%, Expected 0.9%, Previous 0.5%) and the Chinese HSBC Flash Manufacturing PMI (Actual 49.1, Previous 47.9) the Aussie has rallied from the 1.0250 area. Its closes were held above the .618 fib (daily chart, low on 10/8 to high on 10/18.) The Aussie is currently trading at 1.0350, but despite this rally we really have to see an increase in risk appetite to support an Aussie uptrend. It can happen, but I prefer playing this pair to the downside after a period of consolidation.
Note: I consider the FOMC minutes due out later today to be a wild card which could cause a large move in either direction.
BeamFX is a Guaranteed Introducing Broker for Institutional Liquidity (ILQ). Open a free demo account today!
Tuesday, October 23, 2012
Forex Trading Update: USD/JPY
USD/JPY
Before today's close on the daily chart, the USD/JPY had gone up 8 consecutive days in a row. That's impressive considering the last time it happened was in March/April of 2011. The extended move up has mostly been driven by jawboning by Bank of Japan officials, with market participants beginning to price in another round of stimulus.
In my opinion, the most important thing to watch is how USD/JPY behaves in relation to the 10 Year US treasury note when market sentiment is negative. Typically, during a "risk off" phase, the yield on 10 year US treasury notes decrease. At the same time, the USD/JPY usually goes down as well, as there is a higher real rate of return on 10 year Japanese Government Bonds then there is on 10 year US treasury notes. Now, following this logic you'll realize that if the the 10 year JGB's real rate of return were to decrease and the 10 year US Bond's real rate of return were to be held constant, then there would be less demand for 10 year JGBs relative to its US counterpart during a "risk off" phase.
I believe what we have been seeing over the last 8 days is a slow continuous change in the expectations of the real rate of return on 10 year Japanese government bonds. Why? Look at the 10 year U.S. Treasury note. It closed with a negative yield change of .0562 today (a 3.10% decrease) and the USD/JPY only dropped 10 pips today! (open to close.) There has been a strong inverse correlation between USD/JPY and a 10YR US Treasury note over the last year; but we may continue to see that correlation weaken in the near future.
Here are the three reasons which I believe have been causing the Yen to depreciate. First, expectations about the Bank of Japan conducting another round of stimulus causes a change in inflation expectations (a lower real rate of return.) Keep in mind, that the BOJ is TRYING to cause inflation as they have been struggling against deflationary pressures.Second, Japan's economy has been slowing down, driven not only by the slowing growth in Europe, the US, and China, but by their recent disagreement with China over a small group of islands. This dispute has fueled nationalistic anger in both countries and has led to Chinese consumers buying substantially less Japanese products. Third, there is a political firestorm brewing in Japan. The government will run out of money in November unless they reach an agreement. Politics over how to refinance there debt has reached critical importance as their Debt to GDP ratio in Japan is now 211%!! As we have seen very clearly in the United States, political disagreements over fiscal and monetary issues can have a big impact on equity markets (i.e. the fiscal cliff)
Let me be clear, I'm not advocating going long USD/JPY right here at the 80.00 level. I'm laying out what I consider to be the fundamental drivers of the Japanese Yen so that you can better understand how future developments may impact the currency.
BeamFX is a Guaranteed Introducing Broker for Institutional Liquidity (ILQ). Open a free demo account today!
Before today's close on the daily chart, the USD/JPY had gone up 8 consecutive days in a row. That's impressive considering the last time it happened was in March/April of 2011. The extended move up has mostly been driven by jawboning by Bank of Japan officials, with market participants beginning to price in another round of stimulus.
In my opinion, the most important thing to watch is how USD/JPY behaves in relation to the 10 Year US treasury note when market sentiment is negative. Typically, during a "risk off" phase, the yield on 10 year US treasury notes decrease. At the same time, the USD/JPY usually goes down as well, as there is a higher real rate of return on 10 year Japanese Government Bonds then there is on 10 year US treasury notes. Now, following this logic you'll realize that if the the 10 year JGB's real rate of return were to decrease and the 10 year US Bond's real rate of return were to be held constant, then there would be less demand for 10 year JGBs relative to its US counterpart during a "risk off" phase.
I believe what we have been seeing over the last 8 days is a slow continuous change in the expectations of the real rate of return on 10 year Japanese government bonds. Why? Look at the 10 year U.S. Treasury note. It closed with a negative yield change of .0562 today (a 3.10% decrease) and the USD/JPY only dropped 10 pips today! (open to close.) There has been a strong inverse correlation between USD/JPY and a 10YR US Treasury note over the last year; but we may continue to see that correlation weaken in the near future.
Here are the three reasons which I believe have been causing the Yen to depreciate. First, expectations about the Bank of Japan conducting another round of stimulus causes a change in inflation expectations (a lower real rate of return.) Keep in mind, that the BOJ is TRYING to cause inflation as they have been struggling against deflationary pressures.Second, Japan's economy has been slowing down, driven not only by the slowing growth in Europe, the US, and China, but by their recent disagreement with China over a small group of islands. This dispute has fueled nationalistic anger in both countries and has led to Chinese consumers buying substantially less Japanese products. Third, there is a political firestorm brewing in Japan. The government will run out of money in November unless they reach an agreement. Politics over how to refinance there debt has reached critical importance as their Debt to GDP ratio in Japan is now 211%!! As we have seen very clearly in the United States, political disagreements over fiscal and monetary issues can have a big impact on equity markets (i.e. the fiscal cliff)
Let me be clear, I'm not advocating going long USD/JPY right here at the 80.00 level. I'm laying out what I consider to be the fundamental drivers of the Japanese Yen so that you can better understand how future developments may impact the currency.
BeamFX is a Guaranteed Introducing Broker for Institutional Liquidity (ILQ). Open a free demo account today!
Monday, October 22, 2012
Where Should You Open Your Forex Account?
There are three main reasons traders cite as to
why they would prefer to open a forex account outside of the United
States. Outside of the United States: 200:1 or more leverage is
available, hedging is permitted, and FIFO accounting rules are not
required. Let’s address these one at a time:
1. Our argument against the use of excessive leverage is clear: profitable traders don’t need more than 50:1 leverage. Traders using more than 50:1 leverage are susceptible to wild swings in their account balance and will most likely blow up their account.
2. Under our solution, the customer's trading experience in terms of hedging does not change. In order to abide by the CFTC no hedging rule, the counter party offsets the positions as they receive the orders. When orders are placed on the MT 4 platform, the hedging feature remains available. For example, if you buy and sell a contract on the MT4 software, you will notice your positions are hedged on the interface, however, the orders that have been sent to the counter party have been offset with each other. Your net position remains the same on the MT4 and the back office. When you close your hedge positions on the MT4 software, the new buy and sell orders placed will be offset with each other by the counter party and again your net positions on the MT4 and the back office remain the same.
3. In order to abide by the CFTC FIFO rule, the counter party offsets the positions on a First In First Out basis. On the MetaTrader 4 platform you have the ability to close the positions as you see fit. For example, if you buy a contract and buy another contract at a later time and you decide to close your most recent buy position, you can simply close this position on the MT4 interface, however, the order that is sent to the counter party will be offset with the FIFO rule in place. Your net position remains the same on the MT4 and the back office.
Now, considering that the three cited reasons can be easily addressed, let’s talk about the one main reason in favor of opening your forex account in the United States. This single reason for opening a forex account in the United States overwhelming trumps any reason(s) for not doing so.
Where you deposit your money is incredibly important. You need to know that it’s safe and that the brokers holding it are the most regulated and under the heaviest scrutiny in the forex industry. Trading is hard enough as it is, why expose your funds to unnecessary risk?
The United States is the most heavily regulated Forex industry in the world. All brokers must register with the Commodity Futures Trading Commission and are members of the National Futures Association.
Brokers have daily, monthly, and quarterly operational reporting requirements, detailing customer funds on deposit, # of retail and ECP forex customers that are active, whether they are US or foreign domiciled, and the percentage of non discretionary accounts that were profitable vs non-profitable - among other things. Unaudited financial statements are filed monthly and audited financial statements are filed annually. Failure to comply with these NFA requirements can result in severe disciplinary actions as well as substantial fines and penalties.
The complete regulatory history of all NFA brokers as well as key personnel is available online at http://www.nfa.futures.org/basicnet. Simply search by name or NFA ID# if you know it.
How much do you know about your broker?
1. Our argument against the use of excessive leverage is clear: profitable traders don’t need more than 50:1 leverage. Traders using more than 50:1 leverage are susceptible to wild swings in their account balance and will most likely blow up their account.
2. Under our solution, the customer's trading experience in terms of hedging does not change. In order to abide by the CFTC no hedging rule, the counter party offsets the positions as they receive the orders. When orders are placed on the MT 4 platform, the hedging feature remains available. For example, if you buy and sell a contract on the MT4 software, you will notice your positions are hedged on the interface, however, the orders that have been sent to the counter party have been offset with each other. Your net position remains the same on the MT4 and the back office. When you close your hedge positions on the MT4 software, the new buy and sell orders placed will be offset with each other by the counter party and again your net positions on the MT4 and the back office remain the same.
3. In order to abide by the CFTC FIFO rule, the counter party offsets the positions on a First In First Out basis. On the MetaTrader 4 platform you have the ability to close the positions as you see fit. For example, if you buy a contract and buy another contract at a later time and you decide to close your most recent buy position, you can simply close this position on the MT4 interface, however, the order that is sent to the counter party will be offset with the FIFO rule in place. Your net position remains the same on the MT4 and the back office.
Now, considering that the three cited reasons can be easily addressed, let’s talk about the one main reason in favor of opening your forex account in the United States. This single reason for opening a forex account in the United States overwhelming trumps any reason(s) for not doing so.
Where you deposit your money is incredibly important. You need to know that it’s safe and that the brokers holding it are the most regulated and under the heaviest scrutiny in the forex industry. Trading is hard enough as it is, why expose your funds to unnecessary risk?
The United States is the most heavily regulated Forex industry in the world. All brokers must register with the Commodity Futures Trading Commission and are members of the National Futures Association.
Brokers have daily, monthly, and quarterly operational reporting requirements, detailing customer funds on deposit, # of retail and ECP forex customers that are active, whether they are US or foreign domiciled, and the percentage of non discretionary accounts that were profitable vs non-profitable - among other things. Unaudited financial statements are filed monthly and audited financial statements are filed annually. Failure to comply with these NFA requirements can result in severe disciplinary actions as well as substantial fines and penalties.
The complete regulatory history of all NFA brokers as well as key personnel is available online at http://www.nfa.futures.org/basicnet. Simply search by name or NFA ID# if you know it.
How much do you know about your broker?
BeamFX is an guaranteed introducing broker of ILQ. Join us in our free live trade room Monday - Friday.
Friday, October 19, 2012
Romney Win = Death of QEternity?
As we noted in our previous post there is a possibility that a Romney victory in the U.S. presidential election could cause the stock market to capitulate. All it takes is for the rumor to pick up a little momentum and we could see the dollar strengthen substantially. Keep in mind, if the rumor starts to make the rounds before the election, then a change in the polls in favor of Romney would equate to a greater chance that the rumor could become reality, leading to a stronger dollar.
The name of the game is "Expectations"
For your convenience, I've assembled some current poll results of who is leading the race with links to check up on them. Keep in mind, media news outlets are typically biased and polls typically have a small margin of error.
CNN: Romney 48%, Obama 47%
Real Clear Politics: Romney 47.0%, Obama 47.1%
Gallup: Romney 48%, Obama 47%
WashingtonPost/ABC's Poll: Romney 46% Obama 49%
The name of the game is "Expectations"
For your convenience, I've assembled some current poll results of who is leading the race with links to check up on them. Keep in mind, media news outlets are typically biased and polls typically have a small margin of error.
CNN: Romney 48%, Obama 47%
Real Clear Politics: Romney 47.0%, Obama 47.1%
Gallup: Romney 48%, Obama 47%
WashingtonPost/ABC's Poll: Romney 46% Obama 49%
Forex Trading - Market Update
Risk appetite has weakened on the 25th year anniversary of Black Monday. The biggest downside surprise yesterday was Google's earnings. Their earnings were accidentally reported early and the stock sold off 8.0%. Google's poor earnings highlight investor's growing concerns with Q3 earnings, as other bellweather companies are missing estimates as well, such as IBM and Intel. The moves down in the currency market yesterday were mostly fueled by
Google's earning miss.
However, sentiment seemed a lot more negative then the actual
movement in equity prices. DJIA closed -0.06%, S&P500 closed -0.24%,
and NASDAQ closed at -1.01%. Equities closed negative, but clearly
didn't sell off.
EUR/USD's upward momentum has at least temporarily faltered as it broke below the 1.3100 level and bounced off of a daily close at 1.3056 and consolidated around a previous swing high at 1.3073. There's market talk of a $1 billion option expiry at 1.3050, so that number should be well defended. A close below it could lead to an extended move to the downside.
The Aussie in particular seemed to remain well bid as expectations about the economic situation in China improved. Expectations are a little more negative about China this morning due to the FDI print missing the estimate (-3.8% actual, -3.4% previous.) Additionally, Google's earnings miss put pressure on Asian equity markets which in turn put more pressure on the Aussie. Equity markets in Europe are currently down slightly, but it's the U.S. markets that should really set the tone for the next move in the Aussie.
EUR/USD's upward momentum has at least temporarily faltered as it broke below the 1.3100 level and bounced off of a daily close at 1.3056 and consolidated around a previous swing high at 1.3073. There's market talk of a $1 billion option expiry at 1.3050, so that number should be well defended. A close below it could lead to an extended move to the downside.
The Aussie in particular seemed to remain well bid as expectations about the economic situation in China improved. Expectations are a little more negative about China this morning due to the FDI print missing the estimate (-3.8% actual, -3.4% previous.) Additionally, Google's earnings miss put pressure on Asian equity markets which in turn put more pressure on the Aussie. Equity markets in Europe are currently down slightly, but it's the U.S. markets that should really set the tone for the next move in the Aussie.
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